Wednesday, April 30, 2008

some thoughts on stocks worth owning

how long can aapl go up on rumors of a 3G phone with video capabilities?

if history is any indication, quite a long time.

aapl's one of those stories where there is a story. the smartphone, fully loaded with msft software and a camera that would be like iChat, is simply the best thing that could ever happen to cell phone users. can nok or mot answer it?

the iphone ramp lasted about 50 straight points totally in advance of the release of the design.

could this story be bigger? while one waits, one has a killer mac number building and building as kids need macs to talk to each other. it is, in many ways, a better story than the iphone given that it is already available and already making a lot of money.

in an opaque sort of way, aapl is like ma. aapl's the only tech story that has real momentum and can give you some genuine upside later in the year. ma, only with possibly v, is the only financial story with legitimate upside, given the price increases it is able to sneak in and the worldwide, endless march toward plastic from paper. only game in town!

and none of these companies will be affected by what the fed does.

long v, ma and aapl

one to consider - dlb

This morning, Dolby announced that the Japanese consumer electronics company Toshiba would be the first company to integrate the new Dolby Volume technology into products that will be on the market. Dolby Volume equalizes differences in volume between different audio sources. The volume that a DVD player puts out may be different from the volume put out by a television channel or radio station; this requires consumers to change volume levels any time they change what they're listening to or watching. Dolby Volume aims to fix that by keeping audio levels consistent.

Given that Toshiba is integrating the technology into just four LCD television models, we don't expect much of a financial impact on Dolby. However, the move does help validate the technology, and it could result in other electronics makers considering it for use in their products.

As for Dolby's earnings results, analysts expect the company to deliver earnings of 42 cents a share on revenue of $159 million. Typically, expectations for Dolby are rather high, given that the company regularly delivers upside surprises of stunning magnitude. However, with the economic slowdown, investors have taken a more cautious view of the stock, given its exposure to consumer spending. While slowing consumer spending certainly wouldn't be a good thing for Dolby, I believe the company is well- positioned to continue delivering excellent quarterly results.

The consumer electronics categories that Dolby depends on remain in very good shape. According to the results I've seen from the likes of Best Buy, Circuit City, Microsoft, Intel and Corning, consumer demand for key Dolby product segments such as notebook PCs, high-definition televisions and gaming consoles is holding up just fine. Therefore, I have confidence that Dolby will beat expectations, especially given that analysts have been cutting their earnings estimates in recent months.

today's market action

Although stocks – especially those in the tech, consumer discretionary and financial sectors – were moving higher in anticipation of a positive response to the FOMC’s interest rate decision and then shot higher shortly after the news was out, once things settled down and it became apparent that the Fed didn’t seem to be as concerned over inflationary pressures as many were hoping, the market quickly fell off of highs and into negative territory.

While many were hoping that the Fed would signal that their focus had shifted back to inflation, their policy statement indicates that further interest rate cuts are on the table, and that they expect commodity prices to come back down to earth on their own accord. Of course, the current pricing action in food and energy prices say otherwise, and as such, materials and energy were two of the only three major sectors to finish in the green.

Given the fact that the averages have become a bit extended here as they stagnated at overhead resistance levels, I wouldn’t be surprised at all to see a pullback. That said, for those that believe, some selling here could allow some charts to set back up and provide some better trading opportunities as we move forward.

Tuesday, April 29, 2008

Credit spreads tighter

Credit spreads continue to tighten, mirroring a mood evident in the CBOE's VIX, the volatility index. For example, the yield spread today between Fannie Mae's 10-year note and 10-year U.S. Treasuries is 52 basis points, its most narrow since Jan. 29. The peak was 97.7 basis points on March 14.

Another good gauge of credit conditions is the 10-year swap spread, which tracks the rate paid over and above the U.S. 10-year to swap into a fixed-rate debt obligation from a floating one. The 10-year swap spread has had three distinct peaks since last summer; one in mid-August, one in late November, and then in early March.

Each peak was followed by a gain of more than 1,000 points in the Dow, a reflection of relative reductions in concerns about credit in each case. Today the spread is at 63 basis points, down half a basis point on the day and not far from this year's low of 58 basis points set on Jan. 15 (the peak was 91 basis points on March 6). This means that debtors are not as worried about the potential for wider credit spreads as they were previously.

Another gauge is the yield spread between the KDP High Yield index, which is comprised of 100 issues, and 10-year Treasuries. Yesterday the spread closed at 540 basis points, a decline of 145 basis points from the March 17 peak. Obviously this indicates that high-yield bonds have recently outperformed Treasuries.

goog

i continue to believe that the guys running goog are a heck of a lot smarter than most of the guys on wall street doing research reports on the company. that's not a bold statement...but the extent to which the analysts underestimated last quarter's earnings prove my point.

the stock is still in a trading range and is working off the profit-taking that is inevitable after the big price adjustment. but the stock is testing the 200-day simple moving average and has already surpassed the 200-day exponential moving average.

i continue to believe that as the stock breaks through these barriers, the next stop on this train is about $650 or so.

Can airlines survive $120 oil?

Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense! That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.

Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.

Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.

This group has held an endless fascination on Wall Street from the first days it traded, yet the industry itself has done nothing but accumulated losses since it started. Find another industry to invest in! This one is not investible!

bush's idiocy hurts natural gas

Switch grass. Wood chips. What nonsense. Nuclear's just not happening at all.

Meanwhile, we have the fantastic CEO of Tyson Foods saying point blank that the obsession in ethanol is driving every single foodstuff higher. The whole emphasis is totally fatuous. He is urging other fuels, such as natural gas.

The president in his speech specifically rejected natural gas as expensive. Doesn't he realize that natural gas is a ratio off of oil? Doesn't he know that the pipeline network is being built out, the drilling's begun, the stuff is being produced in record volumes?

I don't think so. Nor does he know the value of conservation and technology and how outfits like Eaton are reining in energy costs and outfits like Halliburton and Baker Hughes are finding natural gas in places we forgot about years ago.

Boggles the mind.

today's market action

Although the averages were able to crawl into positive territory as the afternoon wore on, a wave of late selling ensured yet another mixed close to a lackluster and low volume trading session. Also, materials and energy stocks were the laggards while tech, especially big-cap tech names that led this market last year, attracted some tentative buying interest.

This relationship is likely the result of investors anticipating that a hawkish Fed will fuel the nascent rebound in the greenback, but many are not so confident that the transition is going to be as smooth as hoped. The relative strength in names like GOOG, AAPL, RIMM and MA is encouraging, but we’re going to have to wait until the Fed is out of the way before we can get a better sense of how these new themes are going to develop.

Monday, April 28, 2008

more on gme - and a possible way to play it

i'm bullish on gme, the video-game retailer. gme operates more than 5,000 retail locations throughout north america and europe. its stores sell new and used video-game software, hardware and accessories. the business is well positioned to benefit from several trends, including growth of the gaming industry, a shift in consumer spending habits and consolidation of the retailing environment. sales of game software soared 63% in march, and titles such as "Guitar Hero" and "Halo" have set single- day sales records. this trend should continue, as there are very high expectations for the new "Grand Theft Auto," which is scheduled for release tomorrow.

hardware sales, which showed a 50% year-over-year increase in march, should continue apace as prices for msft's Xbox and sne's PlayStation are expected to decline to the $200 level. also, nintendo's hit Wii platform is finally ramping up production to match demand. as more consoles are sold, sales of software and accessories -- which have higher profit margins -- will also increase. gme, which is the largest specialty chain in the video-game space, should benefit from the broader weakness in spending and a generally tough retail environment. this is leading to industry consolidation as big-box stores such as cc struggle and have been closing locations at least partly due to competition from gme.

in addition, costs could actually decline for gme because rental rates at many retail locations, especially malls, are declining. the stock has gained some 30% over the past two months and recently cleared resistance at the $54 level. however, at $56.50 it is still about 15% below its 52-week high of $63 a share. as consumers continue to allocate more discretionary spending toward home entertainment, gme shares should continue to rise.

here's one possible way to play it:

-- buy to open July $65 calls (GMEGM) at $1.60 a contract.

i have an upside target of $70 a share. i'd use a close below $52 a share as a stop for exiting the position.

disclosure: long gme calls; DO YOUR OWN DD!!

fed to discuss interest on bank reserves

On the Federal Reserve's Web site, there is a notice indicating that the Fed will consider the "implications of interest on reserves for monetary policy implementation." The notice appears in the section on "board meetings," which contains information on the regularly scheduled meetings of the board of governors, which tend to be held once every two weeks.

In this particular case, the matter to be considered before the board will coincide with the decision on interest rates, a further sign of the Fed's intent to use as many tools as possible to help the financial system. It is worth noting that the idea of paying interest on bank reserves has been around a long time and was recently approved by the Congress.

Over 40 years ago, Milton Friedman proposed the idea, and it was pushed for many years by Fed Chairman Alan Greenspan before it was approved in September 2006. Interest on reserves will first be paid beginning Oct. 1, 2011.

There are a few benefits to paying interest on reserves. In particular, doing so removes a very significant burden on banks by removing the need for banks to constantly monitor their reserve levels in order to avoid the opportunity costs that come with leaving reserves on deposit at the Fed and earning no interest. The second benefit is obvious: Banks will earn money on their capital rather than earn nothing. Banks currently hold about $42 billion of reserves at the Fed (by reserves, we are of course referring to the monies that banks set aside as required by the Fed for the deposits they hold).

A third benefit of paying interest on reserves is that banks will be inclined to hold more money at the Fed than otherwise, creating more soundness for the banking system. In other words, "payment risks" would be reduced, with banks having more cash on hand than otherwise.

It is interesting that this issue is being brought up now. It could be a coincidence, or it could be another sign of the Fed seeking as many ways as possible to fortify the financial system.

tex - one i'm strongly considering

one theme i think will play out very well is the global infra/commodities/energy theme, or g-i/c/e/. second quarter earnings reports confirm my fundamental analysis of the global infra boom.

tex is the most undervalued machinery stock in the market today. it should grow 15%+ in revenues and profits through 2010 with excellent positions in mining equipment, cranes, and aerial work platforms. and yet it trades for only 9x's earnings and 6x's 2008 cash flow estimates. this is too cheap to be true.

the global infrastructure markets are just inhaling this equipment to create a reasonable standard of living for their populations. terex has a record backlog and many large equipment pieces are sold out into 2009. this gives them a fair degree of visibility for this year.

terex is just an example of the type of value one can find in the cyclical growth part of the equity market, especially in the g-i/c/e sectors. bouts of profit taking are bound to happen from time to time. but this theme should persist for the next couple of years.

disclosure: n/a, but thinking about it

are msft's and yhoo's fates increasingly intertwined?

Deafening silence following the passing of a weekend deadline for response to Microsoft's takeover offer. The lack of response has kept implied volatility in Yahoo! options at a 71% elevation above the historic reading. While some market observers believe the failure of a Microsoft deal to materialize through "civil" channels could buy Yahoo shares a little more time at current levels even for a number of months, the option market sees added and immediate risk to its share price over the next 30 days.

Following on from a big day in speculative positioning (Friday's option volume was the highest for Yahoo since the Microsoft "bear hug" was originally made public on February 1), today's market sees heavy volume at both the May 22.50 put strike and the 30 call strike.

A couple of scenarios could be at work here. Traders may be positioning long volatility at each of those strikes, as the combined $1.26 premium would require very little sweetener to Microsoft's original bid, and protect investors against a collapse in the original deal. Or there may be reverse collars in play.

Today's 2.4% decline for Microsoft shares to $29 following Yahoo's mute rebuff suggests that the market feels the fortunes of this odd couple are in some sense entwined. In other words - a collapsed deal is bad news, not just for Yahoo, whose executives have delivered shareholders an I.O.U. on performance in recent quarters, but Microsoft, which seems bereft of sources for growth as it cuts revenue forecasts. Like a tetchy married couple gone to bed angry, option traders see no other possible alliance for these two cantankerous tech tickers.

Options in Microsoft show evidence of some traders looking for a quick recovery for Microsoft shares, given the degree of put-selling in the June contract at strikes 27 and 28, where premiums are up by nearly a third today. July 27.50 calls have been bought heavily today at around $2.62 apiece.

you've got to love the ironic hypocrisy!!

saw an episode of dragnet from the '50s today. it was about
teenagers gone wild on 'demon weed.' funny how, in a MATTER
OF DAYS, they go from weed to heroin....but i digress. webb
the narrator goes on and on about addiction, etc. - WHILE
SUCKING DOWN CIGARETTES! gotta love that! hey friday - any
mention of YOUR addiction? and if i'm not mistaken, jack
webb died from cancer......just sayin'

v, the stock and company earnings

v, and also ma, were up today - earnings for v are in tonight and at first glance look fine to me, but the stock selling off afterhours. we'll see what it does tomorrow during the regular session....lots of coverage initiated today on v; wouldn't it have been prudent to issue coverage tomorrow, after the conference call? just wondering. anyway, v's rallied some here in the past week or so - profits may be taken by some. BUT - remember a lot of why v and ma rally much of the time is it that there's no supply and big mutual funds need financials -- these represent financials. we'll see about any upgrades or downgrades on v tomorrow; as well as ma's earnings before the open tomorrow.

today's market

Although the averages were able to inch their way higher after a choppy start to the day, some late pressure pushed the market lower, ensuring a mixed finish to the day. Once again, volume was very light, but even though market players didn’t seem too willing to place many big bets, there was some decent action in the small-caps.

This market has shown marked improvement over the past several weeks, but with the FOMC meeting looming and the averages barely poking their heads above lateral resistance levels, (for those that believe), the bulls are starting to show signs of fatigue.

Of course, it’s hard to blame buyers for any uncertainty at this point. We’ve had a good run, and not only is it unclear as to what sort of tone Dr. Bernanke and his merry band of economists are going to adopt, but the way investors will react once the news is out is completely up in the air.

The Fed has to be looking at recent inflationary pressures, and the general consensus seems to be that the current easing campaign may be coming to an end. A pullback may be looming.

The ball is still in the bulls’ court, but that doesn’t mean we shouldn’t be aware of the possibility that investors may move to protect some of the recent gains sooner rather than later.

some on the watchlist....

TGB

Taskeo Mines is the newest member of the watchlist. This name is a play on the copper industry. The catalyst for the potential move is strong Chinese demand, low inventories and slow growth in new supplies.

DGLY

Digital Ally edged lower last week as it digests recent gains. Technically speaking, this is textbook action, as the stock is resting on light volume after a strong move on volume. Fundamentally, I continue to like the prospects for DGLY.

WSCI

Wsi Industries surged higher last week, adding 29.55 %. This name continues to act well, and has landed in the #3 spot in the IBD 100 this weekend. WSCI had an impressive first quarter earnings report, which included 45 % increase in revenues.

TEVA

Teva Pharmaceutical edged lower last week, giving back 2.68%. The news flow has dried up for this name in the past week, and it drifted lower on light volume towards the bottom in of its base. Nothing fundamentally changed with TEVA this week, though the sector did see some broad weakness. The technical action has deteriorated a bit, and will be keeping a close eye on this name in the coming week should support levels not hold.

Friday, April 25, 2008

rebates

With over seven million tax-rebate checks set to be sent out next week (one week earlier than planned), much attention will be given to the economic impact, and investors will begin scouring all realms of consumer spending for clues.

Chain stores, in particular, will be in focus, and the information gathered is sure to seep through to market prices. More than $100 billion in checks are expected to be eventually disbursed, which is much more than the dollar amount of tax-rebate checks mailed to Americans in 2001 and 2003.

For example, in 2001, the total amount of tax-rebate checks was $38 billion; in 2003, the tally was about $15 billion in checks and $20 billion in reduced tax withholdings.

According to the White House, "The experience of the 2001 and 2003 tax cuts shows that providing tax relief to families stimulates the broader economy by boosting household spending.

"For example, rebate checks increased total consumption by about 0.8% in the quarter that the 2001 rebates were received, and about 0.6% in the subsequent quarter." As the non-partisan Congressional Budget Office noted, "Most analysts agree that the 2001 rebate stimulated the economy."

Note that the 2001 rebate checks were mailed out in late July, and most of the roughly 100 million checks were sent within 10 weeks.

Staffers at the Federal Reserve in 2005 published a 31-page analysis on the 2003 tax cut (Coronado, Lupton, and Sheiner, Finance and Economics Discussion Series, July 2005), saying in the abstract for the paper that "The Jobs and Growth Tax Relief and Reconciliation Act of 2003 has been described as textbook fiscal stimulus. Using household survey data on the self-reported qualitative response to the tax cuts, we estimate that the boost to aggregate personal consumption expenditures from the child credit rebate and the reduction in withholdings raised the average level of real GDP in the second half of 2003 by 0.2% and by 0.3% in the first half of 2004. We also show that households in the survey were well aware of their tax cuts and tended to spend equally out of the child credit rebate and the reduced withholdings, a result that is contrary to the conventional wisdom."

did anybody buy c when i advised to do so?

but i don't want to brag too much....at best, i advised buying it at about 18/19....and before that i had advised to buy it at book value, about 22 or 23; so up at least 20% since then ain't too bad.....just sayin'...

today's market

although it was looking like market players were just ready to close up shop and call it a week, a fresh wave of buying kicked in about two hours before the close, sending just about the entire market back to the highs of the session. there didn’t look to be any particular catalyst, and the buying was spread across sectors.

while the averages finished in mixed territory, they were able to make some technical progress, for those that believe in that, but now that the major reports are just about out of the way, some suspect that a more significant pullback may be in the cards.

for now, however, the ball is in the bulls’ court. certainly, some more upside in the near-term looks to be probable, but a game plan for future weakness might be prudent at this point.

Thursday, April 24, 2008

Dealers say no thanks

Dealers decided they did not need the Fed's Treasuries, bidding to swap for just $59.5 billion of the $75 billion that were offered to dealers, which can obtain the Treasuries in exchange for agency securities and certain mortgage-backed collateral, including so-called private-label securities (non-agencies). This means that dealers are not having difficulty liquefying their assets (relatively speaking) and need not turn to the Fed for liquidity.

some good news

Results of the Treasury's $19 billion auction of five-year notes were weak, despite the five-year's yield having moved more than 90 basis points above last month's low of 2.20% (March 17). The results signal increased preferences toward riskier assets such as corporate equities and corporate bonds, which fits with recent trends in the financial markets.

The results should be seen as good news in light of recent anxieties in the financial markets, with investors moving away from risk-free assets.

The bid/cover ratio for today's auction was 1.65, the lowest bid/cover ratio since February 2003 and well below the one-year average of about 2.40. The cover ratio, however, was based on an average auction size of $13.75 billion, which means the average size of bids submitted for the past year's five-year auctions was $33 billion, which equates to a cover ratio of 1.74 for auction sizes such as today's record $19 billion auction. This means that although today's cover ratio was below normal, it was not materially below normal, as the headline figure suggests.

A glaring signal of the auction's tepid demand was its yield. The stop-out rate, which is the rate awarded to all bidders (this was a Dutch-style auction), was 3.159%, well above expectations for a yield of between 3.12% and 3.135% (Market News data). In other words, not only was the amount of bids low, bidders were not aggressive.

today's market

strength in the dollar and a good earnings report from aapl triggered some dramatic sector rotation. commodity and cyclical plays that are sensitive to the dollar, such as steels and oils, pulled back sharply, while market players bought retailers, financials and semiconductors in hopes that new leadership was starting to emerge.

that is exactly the sort of shift that the market needs in order to work higher. groups like fertilizers, solar energy and base metals have become too extended for prudent buying, and we needed to see that buyers were secure enough about the market to shift into some new sectors. that is what has happened, and now the test is going to be whether the groups that lead today can gain some momentum.

one of my biggest concern at this point is that after the msft report tonight, the major earnings reports are just about over, and we will no longer have those catalysts. this move has probably been fueled by low expectations and then some good reports from goog, intc, ibm, aapl, etc.

we ended up with a weak close after some euphoric intraday action, and now we have a flood of earnings reports tonight. msft numbers are out and look slightly ahead, but guidance is light, and the stock is trading down. there will be a lot more to come there, but it doesn't look like any big blowout, and the response so far is fairly tepid.

goog

goog says its 68 million unique visitors spend an average of 54 minutes on the site every month. that means americans spend 748 million hours watching youtube videos each year. by comparison, the Texas Transportation Institute reports traffic annually wastes 4.2 billion hours and costs our economy $78 billion.

if goog ever figures out how to effectively monetize youtube's dedicated eyeballs, msft and yhoo better watch out.

the future monetization of youtube will be stunning. frankly, the $1.6 billion or so that goog paid for youtube may look like some of the best money spent in silicon valley for a long time.

if i had to guess how this will play out will be in multiple streams. first, we could see specific ad supported content like tv shows, movies or various forms of premium content. this would allow advertisers to rifle shoot ads to specific content. second would be fairly simple billboard type ads on pages that contain general content. i think the billboard type ad placement is an under appreciated form of ad spend on the internet currently. third would be search related queries that pertain to specific video content: say a search for a movie, book or music related to a youtube video.

and i could dream up three or four more forms of internet-related ads that could be tailored to youtube content.

Wednesday, April 23, 2008

could the g7 be considering a currency intervention?

g7 meeting participants seem to feel the recent g7 statement was something much bigger than markets have treated it. french finance minister christine lagarde likened the statement to the 1985 Plaza Accords, which was of course a monumental event for the currency markets. others have said the markets misunderstood the gravity of the statement.

this has me thinking that a major round of currency intervention is in the realm of possibility, even though this apparently was not discussed at the time by g7 participants.

of course, for a market that trades $3 trillion per day, intervention has only symbolic value unless it is backed by policy actions, such as the fed ending its rate cuts. this reality could affect the timing of any decision to intervene.

moreover, it is usually best that intervention occur when some sort of pain threshold has already been reached for speculators, which is obviously not now the case. in other words, the best time to intervene is when the market has already begun to move in the desired direction. losses make a speculator honest.

a rally in the dollar would dent the commodity rally and benefit nations worldwide. in light of food shortages and the problems associated with energy costs, it behooves the g7 and other nations to interrupt the commodity rally, to make it less than the one-way bet it has become. this can be accomplished with a reversal in the dollar.

a key factor shaping the dollar's drop is diversification, with the dollar moving from 70% of reserve assets to about 63%. the euro has ascended from 20% to 27%, which means there is room for this sort of diversification to continue. nevertheless, it is time to slow it and break the back of the commodity bubble, which is rooted in part in the weakness of the dollar.

today's market

it was encouraging today to see the pullback in recent hot stocks and outperformance by technology and small-cap chinese stocks.

the scramble for the exits mid-day in the financials as well as the continuing lack of volume suggests that investors still lack confidence. we’ll see how the market handles more earnings news, but a good portion of this market continues to struggle for some traction to the upside.

Tuesday, April 22, 2008

one i'm seriously looking at buying - tgb

this morning cooper mining firm Freeport-McMoRan had its target increased to 200 from 130 by Lehman Brothers due to projections that cooper prices will average $4.50 a pound in 2009 up from around $2.75. the catalyst for this move is strong Chinese demand, low inventories and slow growth in new supplies.

this theme looks attractive to me. tgb is a Canadian based miner of primarily cooper but also has deposits of gold and molybdenum. raymond james has stated that taseko is the most inexpensive copper producer relative to its net asset value of over $9.00.

earnings estimates for the company vary widely but rj is estimating earnings per share of $1.36 for calendar year 2008 which obviously makes the stock quite a bargain.

technically the stock has been basing just above its 50 day moving average and looks good for establishing an initial position.

today's market

although stocks were able to finish off the lows of the session, it was another poor day for the market. drip, drip, drip. bear market torture: big up days followed by many consecutive down days, wiping out the gains. classic bear market action. volume, though increasing, was still very light, breadth was a bit better then 3:1 to the negative and, not surprisingly, energy was the only sector to finish in the green. meanwhile, retailers were hit particularly hard as were the chips.

Monday, April 21, 2008

a mixed bag from bac

bac reported first-quarter 2008 financial results this morning before the bell, and, as feared, some of the numbers were worse than expected, although there were a few positive items as well.

eps of 23 cents was well below the consensus estimate of 41 cents, while net revenue of $17.3 billion was almost $800 million greater than the $16.5 billion consensus estimate for the bank. all of the writedowns in the collateralized debt obligation and leveraged loan book and also the home equity, small business and homebuilder portfolios (provision expense increased from $4.78 billion to $6 billion) were expected, and maybe even better (or less worse) than expected, per one analyst.

despite the 60% drop in global consumer banking earnings, net revenue here (excluding the v gain) was 3% higher sequentially in the consumer division, and non-interest income (also excluding visa) rose 21% year over year -- both better than expected, particularly since global consumer net revenue usually declines sequentially from fourth quarter to first quarter. the visa ipo generated a $700 million gain for bac in the quarter.

retail deposit growth grew 2.3% sequentially and, per Ken Lewis on the call, was indicative of bac taking share. the credit and capital markets numbers were bad, while some of the unrelated consumer and corporate segments showed good growth. the question remains as to whether bac is diversified enough to offset some of the deteriorating credit concentrations with growth in other areas.

tier I capital actually rose, from 6.8% in fourth quarter 2007 to 7.15% in first quarter 2008. on the conference call, Ken Lewis went out of his way to say that it is liquidity in addition to capital that determines bank credit-worthiness, and he went on to say that bac has 20 months of liquidity available.

the dividend policy will be maintained, per Lewis, unless a further "significant deterioration" occurs in the U.S. economy.

the cfc acquisition will close in the third quarter.

while bac's numbers were ugly (and not unexpected), the question remains whether the second-largest bank in the country can generate pre-tax profitability to prevent capital and liquidity erosion from the housing, home equity and homebuilder portfolios and gradually restore the capital base. the best news i heard on the call was that, as of today's earnings release, the company has no plans to cut the $11.4 billion annual dividend, which equates roughly to $2.56 per share annually, or close to 7% based on where the stock is trading today. otherwise, funds would dump the stock like crazy.

right now, a decision to purchase bac stock is a call on the economy: if you think the economy has bottomed, then you could probably safely own Bank of America. i think a 7% dividend yield puts a floor under the shares for a short time. also, the Moody's action announced this morning, while seemingly ominous, still leaves Bank of America with a senior debt rating of AA2 (very high quality but still on negative credit watch) and means that the company is not nearly in as bad of shape as some smaller, regional competitors.

long bac

the yield curve is at its flattest since february

reflecting reduced expectations for future rate cuts, the yield curve is today at its flattest in over two months. the yield spread between two- and 10-year notes is currently at 157 basis points, down 1.5 basis points on the day and its narrowest since 2/1/08. the peak was 208 basis points on 3/6/08, when rate cut fever was reaching its high. odds of a rate cut have fallen sharply since then, such that the market now sees only one more rate cut for the current cycle and rate hikes as early as the end of this year.

the flattening of the curve will have its limits until more-definitive views on rate hikes develop, as the two-year note tends to stay very close to the funds rate.

the two-year is today at 2.19%, which puts it above the 2% funds rate that is expected to be in place next week. the two-year is now 84 basis points above last month's low. now that the two-year is trading closer to the funds rate, the Treasury market is much more fairly valued than it was a few weeks ago when there were unreasonable expectations for the funds rate.

for equities, the flattening of the curve might seem as bad news because it reflects reduced odds of a rate cut. more important, however, is that the reduced rate cut odds herald more optimism about the economic outlook than existed a few weeks ago. it is hence good news for now.

video games; gme

quite a bit happened in the video game world recently. first, npd reported that march sales numbers were astoundingly strong, with software sales up 63% year over year and hardware sales up 51%. the only disappointment was with lackluster sales of the Sony PS3 and Microsoft Xbox 360, though the latter is still supply constrained. Super Smash Bros: Brawl was an absolute monster, moving a whopping 2.7 million units, while Ubisoft's Rainbow Six Vegas 2 and Electronic Arts' Army of Two also did pretty well.

in sum, it's the same old story: the economy is slowing, but the gamers haven't yet noticed.

buzz for Take Two's (TTWO) Grand Theft Auto IV has become absolutely deafening, and we should see reviews start to filter in later in the week. also, GTA IV will mark the series' first foray into multiplayer mode, and I fully expect Xbox Live and the PlayStation Network to crash because of the increased traffic load. regardless, the mainstream media are about to start covering the GTA IV story, which could drive increased investor interest in video-game stocks.

earlier today, gs downgraded gme to a sell rating, saying the following: "While the much anticipated release of Grand Theft Auto IV (GTA IV) at the end of April is expected to produce record sales, and Wii Fit, slated for May, is also expected to be a blockbuster, the remainder of the year lacks any big releases, and compares get tougher throughout the year as we lap titles such as Halo 3 and Guitar Hero 3."

goldman's disdain for the stock is fine with me, but the statement "the remainder of the year lacks any big releases" simply has no basis in reality. on top of the usual batch of sequels to annualized franchises, we have Metal Gear Solid 4, Gears of War 2, Star Wars: The Force Unleashed, Starcraft 2, World of Warcraft: Wrath of the Lich King, Fallout 3, Too Human, Prototype, Soul Caliber IV, Resistance: Fall of Man 2, and Killzone 2. the comps will be tough later in the year, but saying there are no more big releases is downright "kooky talk," as kramer would say.

there's also more drama regarding the potential ERTS/TTWO combination. looks like ERTS isn't willing to pay up as many thought it would. i think TTWO owners should take their profits and forget the arb game -- that's only fun with other people's money leveraged to the hilt!

long gs and gme

today's market action

although we saw a couple of brief bouts of profit-taking during the day and the financials lagged, the market again showed some resilience by recovering late in the day to finish in mixed territory. breadth was negative, volume was once again extremely light and buyers focused their efforts on the same handful of groups that have been showing relative strength over the past few weeks, but all in all, the market was able to hold at highs and there was obviously underlying support through the day.

for those that believe, the charts for the major indices remain in good shape here, but it'd be nice to see the buying broaden out. the hot stocks are getting really extended, and when the profit-taking kicks in with those names, we really need to see that money rotate into some other areas.

reasons to be optimistic about higher stock prices in the future

yes, for the time being, earnings estimates will continue to come down, but valuations of equities in general remain very inexpensive, especially relative to interest rates. the so-called ‘Fed Model’, which compares the earnings yield (the inverse of the P/E ratio) on stocks to the yield on the 10-year U.S. Treasury. equities are cheaper today than they were at previous market bottoms in 10/02 and 3/03.

i think that stock prices will be higher by the end of the year and, more importantly, i believe that they will be significantly higher three-to-five years out. in addition to factors outlined above, reasons for my continued optimism include:

1) Tremendous amount of pessimism gripping investors
2) $3.4 trillion that is sitting in money market mutual funds
3) Lack of significant insider selling (and the increase in actual buying) by corporate executives
4) The relative health (outside the financial and housing sectors) of corporate balance sheets
5) The buy list for value investors such as The Prudent Speculator newsletter now contains a near-record 200 undervalued stocks
6) The fact that emerging and other foreign markets have not proved to be much of a safe haven for those who have shunned U.S. equities.

one to consider - gfig

shares of gfig have fallen sharply since last thursday to a recent quote of $11; gfi took a big tumble on friday as the company announced the departure of Donald Fewer, head of its north american credit products brokerage business. in addition, the company said it believes that two dozen credit products brokers -- representing about $50 million in 2007 revenue -- may be in the process of defecting to a competitor.

it cannot be argued that the departure of mr. fewer, as well as the potential departure of the brokers, won't have a negative impact on the company. that's because the company's compensation expenses could rise in reaction to an increasingly competitive market for talent. in addition, gfi hinted at potential legal action in the matter, as it's possible that some brokers could be breaking noncompete agreements or other parts of their employment contracts. so any associated legal expenses could be another burden on the bottom line.

however, the real question becomes, does the stock's decline already reflect all the potential negatives here? probably so, especially since the brokers in question accounted for just 5% of the company's 2007 revenue. plus, gfig has a rather diversified business model, with exposure to other classes of securities such as commodities and equities.

in the press release from friday, gfi also preannounced roughly in-line first-quarter earnings results, a positive given investor concerns that the credit crunch and hedge-fund industry slowdown would negatively impact gfi's financial results. i think it's prudent to seriously consider shares of gfig here at about 11, given the negativity surrounding gfig.

one to consider - oi

oi is the kind of stock that is likely under the radar screens of most investors, even though it has gained 22% year-to-date. the company is the world's largest maker of glass containers, a business that is booming these days with the push to move away from plastic containers that have a harmful impact on the environment.

in fact, oi is beginning to make glass baby bottles for the first time in about two decades, as there is a push in canada to remove all plastic bottles from the shelves because they contain harmful chemicals. i believe this cause will also take off in the U.S., as folks are proving they're willing to pay more these days for food and products that are potentially less harmful to their own health and the environment as a whole.

oi generates about 70% of its sales outside of north america. plus, demand for beer bottles and other glass food and beverages containers are not that sensitive to the health of the broader economy anyway. at the same time, the company is seeing strong pricing power across the board, as the global market for bottles is supply-constrained.

this allowed the company to blow away fourth-quarter expectations back in january, and i expect a similar result when the company announces first-quarter results on 4/30/08.

at current levels, the stock is valued at just 14.4 times expected 2008 earnings of $4.16. i believe this number will prove conservative, and that shares of oi could trade up through $75 over the coming quarters.

disclosure: none, but seriously looking

some thoughts on stocks worth owning

it seems like v and ma are up most days; these companies cannot convince the shorts that they have nothing to do with retail and everything to do with the worldwide trend toward plastic not paper.

second, they are fabulous core positions for big mutual funds, and the funds come in every day looking to find sellers to build up positions that are still way too small.

third, they count as financials so therefore allow you to "weight" financials in your portfolio -- still ridiculously high at about 18% of the S&P -- without getting hit by all the ugly sticks, including the ncc's and the wm's.

these two stocks are classic demutualizations, where you have these companies not run for streamlined profit that are suddenly on a mission to show profits -- think cme and pru if you want the obvious ones. wasn't nyx supposed to be one of those?

visa, in particular, is a bit mystifying. it is more expensive than ma, but because of the dollar price of ma and the stark realization that you missed the first 180 points, v looks like the horse to bet on. i like both of them, but think that the ma numbers are still way too low.

do your own DD, but don't be afraid to jump in. they are the cheapest way to play the financials if only because they have growth.

sgp is probably going up simply because there is a growing recognition that the amount of decline in revenues for Vytorin forecast by mrk just isn't that great, despite how much the media is making of it. this is the quarter where Vytorin is no longer two-thirds of SGP's profits because of the Organon acquisition.

the absurdity of pm's stall seems downright silly. this stock is much too cheap vs. its growth rate, but people want to see the quarter first.

Saturday, April 19, 2008

another thought

here's a somewhat controversial statement these days - if the earth's warming, it's a paltry trend.....0.31 degrees fahrenheit per decade since the mid-1970s. and even that 0.31 degree figure is suspect. for years, records from surface thermometers showed a global warming trend beginning in the late 1970s. but temperatures sensed by satellites and weather balloons displayed no concurrent warming.

these records have been revised a number of times. they are the surface record from the United Nations' Intergovernmental Panel on Climate Change (IPCC), the satellite-sensed temperatures originally published by University of Alabama's John Christy, and the weather-balloon records originally published by James Angell of the U.S. Commerce Department.

the two revisions of the ipcc surface record each successively lowered temperatures in the 1950s and the 1960s. the result? obviously more warming – FROM LARGELY THE SAME DATA.

some thoughts

i hate politics; i strive to be 'apolitical,' for lack of a better term. however, facts are facts: democrats have made affordable health care a mainstay of their election agenda, but apparently only if you're willing to get insurance through the government. witness their stealthy assault on americans who prefer the private-sector option of HSAs. this week, the house passed legislation that included a provision to require every HSA transaction be reviewed and verified as a legitimate medical expense. democrats say this is to ensure that consumers are using their tax-free withdrawals for a knee replacement, rather than a new iphone. in reality it adds a layer of bureaucracy that could sharply reduce the appeal and cost savings of HSAs.

airlines' airplanes are safer than ever, and flights on us airlines have never been as crowded. the last crash of a commercial jet occurred in november 2001, although the number of flights has increased substantially in the past six and one-half years.

can more effective regulation by the faa explain the recent improvement in airline safety? no - and this latest drama starring the faa, southwest and american airlines probably cost a few lives by forcing some travelers into their cars...

something of interest in today's journal

thornton oglove, a pioneer in the field of earnings quality, is profiled in Herb Greenberg's Weekend Investor column in the weekend edition of the Wall Street Journal ("Old Pro Weighs In on Earnings Quality," B3). oglove wrote the authoritative text Quality of Earnings, which is a must read, especially for the information on taxes, receivables, and inventory.

and here's a controversial idea given the world we live in, with the bear market in stocks right now, jim cramer throwing things around his studio and non-stop ads about trading on cnbc: (and this coincides with the thinking of the good folks at the prudent speculator - if you ever get a chance to hear john buckingham speak, DO IT) one PROVEN way to get rich with stocks is to own small amounts in lots of companies, and then hardly ever sell. buy and hold does pay, even though you will have your share of lemons.

speaking of greenberg, he's washing his hands of printing ink, both liquid and digital. on 5/1/08, he leaves "MarketWatch, Dow Jones and traditional journalism," as he writes in his blog, to start an independent research firm with CFRA's Debbie Meritz.

Friday, April 18, 2008

an update on the fed's balance sheet

the fed's balance sheet did not change much in the latest week after having undergone significant changes in the several weeks prior, according to new data. the main highlight in the Fed's so-called H.4.1 report, which is titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," was the continued decline in the Fed's Treasury holdings, which totaled $11.5 billion in the week ended April 16. that decline was the smallest in five weeks since before the creation of the Primary Dealer Credit Facility (PDCF). the fed now holds $589 billion of Treasuries, which is $232 billion lower than at the beginning of December when the Fed launched its Term Auction Facility and began making big loans to banks.

the decline in the fed's treasury holdings reflects the fact that the Fed has substituted facilities such as the TAF as a way of injecting reserves into the financial system. this is causing some degree of anxiety among market participants, with some observers extraordinarily anxious about these developments. the focus on the Fed's balance sheet is likely to remain intense for as long as the financial sector is tapping the Fed's balance sheet for extraordinary amounts of liquidity. observers will show particular consternation with the decreases occurring in the Fed's holdings of U.S. Treasuries.

Some Background

here's a bit of background on the fed's balance sheet. in the H.4.1 release, the fed indicates the amount of "Reserve Bank credit" outstanding. the figure, which in the week ended April 16 was at $867 billion, represents the amount of money that the Fed has placed into the banking system.

the vast majority of the money is injected into the financial system through the fed's purchases of us treasury securities. since december, when the fed began its Term Auction Facility, the Fed has been selling its Treasuries to offset the other means by which it is injecting money into the financial system. if it didn't, the amount of money in the financial system would balloon, pushing the federal funds rate below the target rate set by the Federal Open Market Committee. in other words, if the Fed lends banks $100 billion via its Term Auction Facility, it must sell $100 billion of Treasuries, or else $100 billion of additional monies would be put in the financial system, an amount large enough to cause the federal funds rate to plunge, hence igniting inflation pressures.

Dollars in Our Pockets

it is important to keep in mind that of the $867.7 billion of money placed in the financial system by the Federal Reserve, most of what is on the other side of the accounting ledger consists of claims that are extraordinarily unlikely to be presented to the Fed, chiefly currency in circulation, which accounts for $816.6 billion of claims against the fed. in other words, the only way by which the Fed would be forced to liquidate its assets would be if there was a sudden surge in claims against the Fed by those holding paper money. this is extraordinarily unlikely.

Where the Risk Is

where there is risk is in the collateral held by the Fed for the credit it is providing to the financial system via the TAF and PDCF and against its repurchase agreements. the fear is that the assets might decline in value and the Fed, which has recourse against the assets, would lose money if the counterparties failed to meet their obligations to the Fed.

tis fear is somewhat rational only because it is possible, but such fears are very misplaced given the types of collateral that the Fed is collecting and because the collateral has already been marked down by an amount that already assumes massive foreclosures in the housing market. moreover, given the movement in washington toward buying or insuring risky mortgages, a further backstop against losses on the high-quality collateral submitted to the Fed is implicitly in place. an added backstop is that inventory tallies are beginning to fall and will probably fall enough to enable blk to go slow on its sales of bsc's collateral given that the Bear loan needn't be repaid for 10 years.

Figures Are Fine, but Psychosis Matters

still, what i am citing are facts and figures, which in most cases would be enough to figure on what might be next for the economy and the financial markets. what we are facing, however, is psychosis and confidence issues, which can easily overwhelm the facts and figures.

today's market

although the major indices lost a bit of steam into the close as market players booked some of their gains, there’s no getting around the fact that it was a strong day for the market. the averages were able to move to a short-term higher high, financials, tech, industrials, energy and consumer discretionary led to the upside, breadth was just under 7:2 to the positive, and while options did expire today, volume levels finally showed some life.

for those technically inclined, the biggest and strongest rallies come in the midst of a primary downtrend, and that is a function of the need for the big money to show performance on a relative basis. a gap like the one we had this morning will get market participants worried about underperforming, and that will trigger a rush to add long-side exposure.

again for those technically inclined, without a doubt, much of the gains this week came because earnings expectations were so low, but the bar has been raised and the market continues to face significant lateral resistance levels. there are plenty of reports due out next week, so we’ll have to see if investors continue to be as enthusiastic as the were this week.

a preview of bac's earnings on monday

while analyst consensus for bac's first-quarter 2008 results (due early Monday morning) are for earnings of 41 cents per share on $16.46 billion in net revenue, and for year-over-year declines of 65% and 4% respectively, the real issue for the company and the one question investors have to be asking is: how much (in losses and dilution, if any) can we expect and how soon will it happen?

will bac's news be as bad as wb's or will they be more like jpm, given the capital markets presence?

a note out of credit suisse's bank team on 4/3/08, analyzing both bac and wb for capital adequacy and excess capital generation, found both banks wanting, but bac was thought to be in relatively better shape than wb. one interesting line from the report: "Based on our analysis, BAC appears better positioned to recoup any potential capital shortfalls near term (excluding dividends) with its respectable pre-provision, pre-tax profitability."

i've owned calls on bac for awhile now. i think by this time next year the stock will be appreciably higher; and the cfc acquisition at that time will look much more savvy to alot more investors. but if i had to advise someone who's interested in getting into the name for the first time, i suppose i'd say wait until after the report. if it were 10% lower, i'd say otherwise, but it's not.

the estimated 2008 dividend of $2.56 is now giving bac a current yield of better than 7%, and the payout ratio is better than two-thirds of current earnings. bac is weathering the storm; i obviously think it's undervalued since i own it already; but for those wanting to jump in - wait until after the report on monday to decide.

long bac

Thursday, April 17, 2008

demand for fed auction remains light

demand for the fed's treasury securities remained relatively light in today's opening of the fed's tslf, a facility used by dealers to obtain treasury securities in exchange for agency securities, agency mortgage-backed securities, and certain non-agency securities.

just $35.1 billion of bids were submitted, much less than for the first TSLF auction on 3/27, when $86.1 billion in bids were submitted. the small amount of bids for collateral at the TSLF auctions contrasts with still-high demand for credit by the nation's banks via the fed's taf. this might compel the fed to increase the size of the $100 billion TAF facility, which has been fully utilized.

the tslf is a $200 billion facility and hence has been underutilized. this could become more apparent next week, when $75 billion of the TSLF facility rolls off and is replaced by a smaller sum (each TSLF is for 28 days).

today's tslf was a Schedule-1 auction, which is for higher-quality securities. last week's was a Schedule-2 auction; the fed alternates between these types.

today's market

the indices held up pretty well today, although breadth was negative and many of the momentum favorites pulled back. the strength was mainly driven by financials and by mer in particular. solar energy, fertilizers and some of the more extended stocks saw some profit-taking kick in, but bottom-fishing in financials helped to shore up the action.

goog earnings after the close are very good, and the stock is trading up sharply and taking many other technology stocks with it. this is very similar to what happened on ibm's earnings last night, but for some reason that emotion failed to hold up overnight. it may be different with goog because it has been a momentum favorite in the past and may fan the speculative flames with a big gain.

the those that believe, the indices look in pretty good shape technically. i was surprised that the ibm news didn't help deliver better momentum today, but we certainly held up well overall, so it's tough to find fault with the action. possibly the 'news' out of mer dampened things a bit. with the goog report sucking in buyers, we are likely to see some anxiety over adding some long exposure - although c's report tomorrow morning could change that.

Wednesday, April 16, 2008

one sector defying the slowdown: video games

for the longest time, i never understood the importance of video games in peoples' lives; and entertainment in general, for that matter. no more - are video games the 'talkies' of the '00s? during the depression, millions of ordinary people thrilled to the exploits of the park avenue set on the silver screen, swilling martinis and living it up - an escape from reality.

obviously, we're not in a depression - but the slowing economy has led consumers to cut back sharply on discretionary spending. but they still appear ready to pony up for the latest video games, as the sector has appeared relatively immune to the broader tech slowdown.

on thursday night, we should get further confirmation of that trend, as market-research firm NPD will report march retail sales figures for the industry. here's what to look for.

the first focus for investors will be the growth in software sales. given the blockbuster nintendo wii release super smash bros.: brawl, analysts are generally looking for growth of around 40%. other key software releases during the month include erts' army of two, and france-based ubisoft's rainbow six: vegas 2. however, i would not be surprised to see software sales growth exceed 50% or even 60%, as analysts have tended to underestimate the strength of key releases. in addition, follow-through of hits from past months, notably sales of activision's call of duty 4, should remain strong.

as far as individual titles' impact on stocks, i am eagerly awaiting sales of thqi's frontlines: fuel of war, which was released in late february and got off to a decent start at retail. however, army of two and rainbow six: vegas 2 probably hurt frontlines' follow-through in march, and a weak performance from frontlines could result in thqi missing its guidance for the fiscal fourth quarter.

next-generation hardware unit sales should stay on the upswing as well, especially for sony's playStation 3, ahead of the release of ttwo's grand theft auto 4 next month. in fact, i expect the playStation 3 to handily outsell the msft xbox 360. for investors in software stocks such as erts and acti, the ideal scenario in this battle is to see the playStation 3 pick up as much steam as possible. this is because the software attach rate on playStation 3 consoles should increase substantially this year due to a dramatically improved game lineup.

and, of course, the wii should continue its impressive momentum given chronic shortages at retail, which have been driven by significant interest from mainstream consumers and nontraditional gamers. plus, super smash bros.: brawl is a true mega-franchise to nintendo fiends and has probably tipped the supply-demand imbalance even further for the foreseeable future.

as far as the stocks go, i continue to like acti due to the dominant game lineup that will come out of the merger with vivendi games. gme remains a top name for me. i expect the stock to rally in reaction to blockbuster industry sales numbers over the next few months. i'm still not really a fan of erts, thqi, or mwy, and i believe that profit-taking is imperative with ttwo, even with the potential for erts to raise its bid above $26 a share.

also, there's more than grand theft auto 4 on the way to keep the industry humming. over the next few months, we'll see the release of metal gear solid 4, mario kart wii, gran turismo 5: prologue, wii fit, lego indiana jones, haze, ninja gaiden 2, and rock band for the wii.

and later in the year, the momentum should keep pumping, courtesy of highly awaited titles such as star wars: the force unleashed, world of warcraft: wrath of the lich king, too human, soul caliber 4, prototype, resistance: fall of man 2, killzone 2 and gears of war 2.

how about some multi-decade themes?

who exports food? the usa. how will we get it there? rails and ships: think bni, csx, nsc. what will be used? equipment and fertilizer: think de, joyg, pot, mon. where will the money go? back into the economy. what will we do with it? invest in alternative energy: solar, wind, nuclear.

long csx, mon

10 year treasury tidbits

treasuries - compared to inflation - are absurdly overvalued.

why? because year-over-year CPI, including those little pesky items like food and energy that none of us use, is 4.0%.

ppi? 7%.

so what should we be receiving for 10 year notes? 7, 8, 9, 10%?

this is why companies like ge are willing to pay 200 basis points above treasuries. it's because their ROE is so much higher.

it's also why i don't buy the argument that muni's are 'cheap' because they are nearly 100% over treasuries. what's the point of comparing one security against an over valued benchmark?

it's like me using tiger woods as the benchmark for my golf game.

today's market

it was a great day for the bulls, but we've seen this sort of action several times this year, and the market has been unable to build on it. we had a big point move and acceleration of buying into the close, breadth was excellent and volume picked up, although it is still fairly light. most important, for those that believe, the major indices all moved back up over key resistance levels and now have the highs of early april as the next major upside hurdle.

although earnings from intc, jpm and wfc will receive the credit for driving the market today, the strength continues to be in the same names that have had the best relative strength all year -- fertilizers, solar energy, steel, various commodities and energy were running hot and heavy. technology and financials were trading better, but they definitely have more work to do if they are going to take a leadership role.

the parabolic moves in some of the agriculture and oil names are a bit worrisome. those moves are at odds with the obviously weak economy in the us and have to be inflationary at some point. we'll see how this develops, but some of the momentum favorites are becoming awfully frothy here.

ibm earnings are out and look quite good. a good report was expected, and this is well above the already high expectations. the stock is up on the news and the indices are higher. mer is up in the morning, and if it doesn't pull any major surprises, we are in good shape for further upside.

Tuesday, April 15, 2008

jpm earnings preview

jpm is expected to report Q1 earnings before the open tomorrow with the conference call following at 9 ET. current Q1 consensus is for eps of $0.64 on $1.69 billion in revenues. obviously, their acquisition of bsc is the main topic. everyone will want to know what of bsc went to the fed and what jpm is holding, as well as what jpm is planning to do with the bsc prime brokerage business.

there may be a few questions about their level 3 assets as well, if they are growing, investors will want to know why, as that may be a dangerous situation. another important area that is just beginning to get some attention is their credit default swaps. they have a large portion of the outstanding CDSs and some high profile economic voices, including George Soros, are very worried that credit default swaps could become a major problem as its very difficult to know who the counterparties are. there will also be many of the same issues as with many of the other banks, how much are charge offs increasing, what is their loan loss provision, and how do they see the remainder of the year playing out for their banking business and the housing market.

2 stocks offer opportunities

after falling sharply in the past 6 months, shares of crox appeared to have found a floor. yet a weak earnings report from crox sent the stock down another 40% today. this is the main challenge investors in small-caps face in this market: bad earnings reports can absolutely punish these stocks.

sell-side analysts were caught off guard, as they seemed generally bullish on crox heading into the quarterly report. moreover, many media pundits were predicting that we have hit bottom in terms of share prices, as they likely already reflect a weak earnings outlook and a possible recession.

as investors in crox will tell you, this is clearly not the case.

there continues to be numerous risks in the small-cap space -- notably in the under-$10 universe -- as there remains more downside risk than upside potential in many situations, regardless of the fundamental growth profile.

for example, most small-caps that miss estimates are declining more than 15%, and those that happen to beat earnings estimates usually see a quick run-up in the stock price followed by a gradual selloff in the weeks ahead. this has become the norm, given that investors want to lock in profits in this tough environment, but also makes stock selection difficult.

that stated, 2 stocks worth watching are rad and mea.

last week, Rite Aid reported in-line fourth-quarter results, but weak guidance for the year ahead pushed the stock sharply lower. looking at the bigger picture, gross margins beat estimates in the quarter, its integration of Brooks/Eckerd is gaining traction and should be completed within six months, and the company will be going up against easy comps in coming months.

the stock is at about 2.50, about 20% lower since the 4/10 earnings report, but the risk/reward has become more favorable. seeing the stock fall to about 2 would make it very interesting indeed.

mea recycles scrap metal, and the rise in metal prices has flowed straight to the bottom line. however, analyst's optimistic growth estimates are based on future acquisitions, so the company could have a minor setback when it reports earnings april 24. this could provide an opportunity to pick up this inflation-hedged play at a discount, as the outlook for metal prices is expected to continue rising due to limited supply and strong global demand. i'm going to look more closely at this name after the quarter is reported.

comments on today's market

although the market was able to recover from the mid-morning weakness to finish in positive territory, the action was once again very dull. technically speaking, volume picked up over yesterday, but is still quite low. the lackluster trading outside of oil and energy stocks is likely a function of the high level of uncertainty as we head into the teeth of earnings season.

again talking technically, the major indices are hovering above recent lows but below key technical resistance levels, and it’s going to take some sort of catalyst to shake things up. right now shares of intc are popping on news that their first quarter results met analyst estimates and their guidance is in-line with expectations. that is spreading to other big-cap tech names like rimm and aapl in after-hours trading. will it carry over into the morning? many are hoping that the low expectations for first quarter results have already been priced into the market. that obviously hasn’t been the case so far, and that has led to a lot of nervousness. then again, that might just end up being a positive for the more bullish in the crowd as we move forward.

a modest retirement? what the hell is that?

pardon me while i stumble up on my soapbox, but when did it become financial law for everyone to live as well or BETTER than before retirement? is the notion of a modest retirement dead?

frankly, i think the concept of "retirement" is a temporary, and even dangerous, condition of human existence. the concept of retirement was a 20th century invention, and it may not be affordable for society as a whole moving forward. as for being dangerous, i believe one should keep moving - or one dies.

but accepting the idea of a "retirement," whatever happened to saving for it? why do so many people feel it is normal to live like kings? are we all so stupid as to believe the garbage we lap up on tv commercials? (oh please forgive me dennis hopper!) the lexus-driving, middle-aged spoiled folks described in recent articles have no excuse for not being prepared for retirement.

how about this mind-blowing idea: SAVE some of your money; live a little BELOW your means; absolutely lose the word "entitlement" from your vocabulary and see how everything turns out. does the world OWE you anything? i don't think so...

Monday, April 14, 2008

more on app

shares of app traded down 10% this morning to $7.50 in reaction to a negative article published by the journal friday night, and here's a little update on this interesting stock that i'm watching very closely. app sold off early last week on heavy trading volume, despite reporting strong march sales numbers thursday, implying that some market participants caught wind of the story ahead of its publication.

while it was factually correct, the article left out a number of important items. for example, the journal noted that the company has weaknesses in its accounting procedures, but the company is currently working to become compliant with sarbox and has hired consultants to help get its house in order.

in addition, the journal failed to note that while app does not have the usual bunch of C-level executives -- such as a chief operating officer -- in place, the company has said it continues to look for key hires while avoiding cookie-cutter candidates who wouldn't work in app's unusual corporate culture. plenty of retailers, such as anf and gps, have deep management teams, but that hasn't stopped their sales growth from falling apart.

also, the journal mentioned a sexual harassment lawsuit filed by an employee, and how app's insurance company refused to pay any damages or legal fees related to the case. plus, it referred to a $10 million lawsuit filed by Woody Allen, whose image was used in a satirical app ad. however, even if the company lost both of these cases it would be able to absorb the losses, especially since the company raised $67 million through warrant sales in february -- a fact that the journal piece conveniently ignored.

app is not a low-risk stock. this is a very early-stage growth story, and the stock is being knocked down not because of a lack of future growth opportunities, but because of media coverage of past failures. i think this stock has the potential to double or triple over the next few years.

disclosure: n/a, but looking closely - do your own DD!

rate cut odds

today's economic data have not influenced expectations much regarding the 4/30 fomc meeting, where market participants are placing 48% odds on a 50-basis-point cut in the federal funds rate, up from 46% on friday.

for the 6/25 fomc meeting, the market is priced for 90% odds of a cumulative 50 basis points in cuts, the same as friday.

for the 8/5 fomc meeting, the market is priced for 100% odds of a cumulative 50 basis points in cuts, and 4% odds of a cumulative 75 basis points in cuts, the same as friday.

hence, with slim odds of a cut built into the august fomc meeting and no odds of a cut seen beyond that month, the market is essentially priced for the fed to end its cuts in june.

the market is priced for greater than 50% odds that a single 25-basis-point hike will occur in the first quarter of next year.

a relatively stable condition in credit?

credit indicators in recent days have signaled relatively stable conditions. one highlight is last week's issuance of high-yield bonds, which, according to bloomberg, moved to their highest level in many months, with seven high-yield companies selling bonds, the most since last september.

an important development of late has been the stabilization in swap rates, which, as noted last month, since last summer have coincided with major developments in the financial markets. for example, there have been three major peaks in swap rates since last summer, each followed by 1,000-point gains in the dow.

swap rates reflect the interest rate that is paid when swapping out of a floating-rate debt obligation into a fixed-rate debt obligation. debtors swap into fixed-rate obligations when they are worried that credit spreads might widen, causing swap rates to rise.

commercial paper rates have been stable; the rate paid on 30-day asset-backed commercial paper is today at 2.93%, down 14 basis points since the end of march. while the yield spread between commercial paper and the fed funds rate remains elevated (68 basis points), it has been stable for about a month. the widest spread for this metric was 191 basis points in december. the libor offered rate has behaved similarly but is more problematic in the european banking system.

Saturday, April 12, 2008

can opec really afford $100 oil?

jim rogers thinks oil may go to $150 or even $200, and it might, but what will be its effect on OPEC? with a high oil price all alternatives to oil become viable. most of the national income comes from exporting oil. they are building massive State Funds that invest the Petro-dollars. these investments should provide returns long after the OPEC country stops exporting oil. the OPEC countries have decades of oil production left. if oil was consistently above $100, businesses would spend a lot of time and effort researching alternatives. if any alternative is found it could seriously harm the economies of the OPEC countries.

Current major OPEC economies.

* Saudi Arabia - 75% of budget revenues, 45% of GDP, and 90% of export earnings.
* Iran - 55% of budget revenues, 25% of GDP, and 80% of export earnings
* Kuwait - 50% of GDP, 90% of exports
* UAE - 30% of GDP, 50% of exports (This is after a massive economic diversification project)
* Venezuela - 50% of budget, 35% of GDP, 80% of exports.

Note: Not all countries listed; numbers are to the best of my knowledge, aka Wikipedia, and might not be totally accurate.

Alternative to Oil?

The single largest use of oil is for petroleum to power vehicles; nearly 53% of petroleum is used to run cars/trucks, etc. car companies are developing everything from electric hybrids to a semi that runs on natural gas (CNG/LNG) and even biogas. the reason behind this is the growing number of people around the world that want cheaper alternatives to petroleum.

it's not that big of a step to convert vehicles to run on biogas or hydrogen. yes, one can modify one's existing car to run on LPG/UNG/Biomass/Hydrogen and the kits are selling in developing nations for about $1000. does opec really want this catching on? the only way to avoid the widespread adoption of these alternatives is LOWER oil prices.

the second-biggest use of oil is for plastics, chemicals and man-made fibres, which is about 10%. with the high price of oil, the race to develop viable alternatives here as well. an example of ingenuity, clear plastic cups made from corn that are CHEAPER than normal plastic cups i found on other online sites, and these are compostable.

something to think about....

a quote

"we hanker after the unnatural or supernatural, that which does not exist, a miracle. as if ordinary reality is not enigmatic enough! m.c. escher

cosmology

what an interesting field of study - it was transformed in the late 1970s by inflation theory and supersymmetry. the former is the idea that for a tiny fraction of a second at the beginning of the Big Bang the universe expanded faster than the speed of light, creating random energy fluctuations that eventually became the large-scale structures of galaxies, galaxy clusters and superclusters. the latter is a theory that relates the properties of particles of force and matter, giving rise to predictions about invisible, or "dark," matter.

Friday, April 11, 2008

today's dreary, horrible 'action'

what a dreary day. thanks ge...although the dip buyers made a valiant attempt to buy the opening weakness and it was looking like the damage from the GE news might be contained, after we broke the morning lows during the New York lunch hour, the major indices spent the remainder of the session sliding lower to close out the day by losing more than 2%.

for the technicians out there - not only was the action ugly, but it also undid much of the progress this market has made since the start of the second quarter, quelled the positive sentiment that had been building, and sent each of the averages back below their respective 50 day moving averages. moreover, this breakdown comes right as earnings season is set to get underway in earnest. it is obvious that the market was not expecting the GE miss, and even though overall expectations are low for first quarter results, many are starting to worry they aren’t low enough.

that stated, the averages have yet break short-term lateral support levels from the end of march. we’ll have to see if they hold and how investors react to several key earnings reports next week, but the sort of action we saw today suggests that a more cautious stance is warranted as we wait again for this market to prove itself.

why weren't some of the big financials down more today?

you'd think with ge's troubles with their financial units, c and bac would be down 5% or more - but they weren't....

some rumors goin' round

rumored takeovers include either ibm or csco acquiring ctxs; goog acquiring expe; x acquiring ati

quattrone's involvement with goog guarantees that goog will not go away quietly in the yhoo/msft deal

high level firings at c and leh - duh!

rubin leaving c and paulson coming in

some ideas for the g7

* Address the impact that mark-to-market accounting has had on financial institutions by looking for ways to reduce the extent to which the accounting rule will act as an accelerant during future crises.

* Seek to establish exchanges upon which large amounts of the $515 trillion of derivatives would become listed. In doing so, there would be more oversight of market participants and improved information for investors on the derivatives outstanding, including information on the types of investors holding the derivative positions.

* Endeavor to create a system whereby mortgage securities are given a UPC-like code that enables investors to track who owns the securities and learn more about the mortgages that underlie the security, right down to the ZIP code. In lock step with this action, holders of large amounts of mortgage securities should be required to list their specific holdings.

* Require rating agencies to create different systems for complex securities, placing emphasis on the need to alert investors on liquidity concerns.

* Endorse proposals by the Financial Stability Forum, in particular the need to more closely link the monitoring of liquidity risks to banks and investment banks.

* Continue to emphasize cooperation on liquidity issues recently addressed by the Fed, the ECB, and, reluctantly, the Bank of England.

grmn is lost

one of the most notably weak areas of consumer technology this year has been the GPS group, particularly grmn, which is now down over 50% on the year.

with mobile phones increasingly taking on advanced navigation functions and broader consumer spending patterns in the us and europe coming under pressure, that decline is justifiable. but after that big move downward, oppenheimer has downgraded that stock this morning from outperform to perform. so is this capitulation, and thus time to jump in on? or should investors continue to avoid the falling knife?

grmn has certainly become a cheap stock, now trading at about 9 times next year's expected earnings and about 1.6 times next year's expected sales. in addition, sentiment has certainly turned negative in the face of all the bad news, with analysts getting more negative on the way down. however, grmn is going to have an awfully tough time outperforming going forward, and i think investors should steer clear of the stock.

sector fundamentals, according to negative news out of GPS chipmaker sirf, GPS device-maker TomTom as well as grmn itself, are clearly weakening with no turnaround in sight.

in addition, as i noted above, consumer spending in developed markets is coming under pressure, and in its march sales release, wmt noted that GPS device sales were very strong, and that is actually a negative. gps is now mass market, indicating that the big-growth days are over. in addition, wmt isn't exactly friendly when it comes to handling its vendors, and that relationship will contribute to ongoing pricing weakness. and on top of all that, it is becoming obvious that grmn faces a major problem in terms of investor psychology.

once a momentum theme dies, and the GPS theme is clearly in trouble, it becomes very hard to convince investors to come back on board, despite how cheap a stock can get, especially when it's becoming painfully obvious that the direction of future analysts' estimates is lower, not higher. therefore, even if grmn can beat considerably lower expectations, the stock is likely to just keep selling off, because the psychology is broken.

now, if this were 2005 or 2006, grmn would actually be a buy right now, because there's a very good chance the company would be rescued by a cash-rich LBO firm. grmn has a ton of cash, and it's pretty easy to imagine the company being levered up, having major expense cuts and then coming public all over again. but with the evaporation of the LBO put, those days are clearly over. now i wouldn't be surprised to see the company do a large share buyback, but financial engineering only goes so far, and the selling is likely to continue.

some remaining grmn bulls may believe that the company's mobile phone, due later this year, could help the company pull out of its funk. i don't think so. the phone idea is a completely defensive one and a clear sign of weakness in the core business. plus, aapl and rimm are making a competitive consumer phone market even tougher, and with mot struggling to keep up, i don't believe grmn's going to come in and steal anyone's thunder.

Thursday, April 10, 2008

app

the company said that same-store sales rose 28.7% in march, a stunning performance considering that the company had a very tough year-over- year comparison with a 25% same-store sales gain in 3/07. and for the first-quarter overall, app's same-store sales rose 37.5%, which is likely to be the best of any retailer out there. apparel retailers have been reporting pretty awful numbers this morning, so i am quite impressed with the company's ability to sustain its blistering sales momentum in this tough consumer environment.

app also said that it opened six new stores in the quarter, with five of them located outside of the us. this is a positive because app manufacturers its products in the us and increasing foreign sales will help the company benefit from the weak dollar. in addition, in reaction to the consumer slowdown, i believe many apparel retailers will slow their store- expansion plans. i believe this will benefit style-driven app significantly as the company will see reduced competition for prime real estate, potentially lowering store-opening costs.

gs shouldn't be down like this

gs is trading down about 2% today, recently changing hands at about 170. that values the stock at just 10 times reduced 2008 earnings expectations.

i think that's crazy. gs, the same company that got things right in the subprime mess and ensuing credit crunch, the company that has picked up a huge amount of prime brokerage business -- carrying huge margins -- after the bsc collapse? gs, with the credit markets at last freeing up? yes, gs, the only company in the business that is buying back its shares.

it's ridiculous. people are freaking out because the company lost money on a couple of bad days. there is just no way this company should be selling so cheaply.

today, the company's ceo talked at the company's annual meeting about how we are in the tail-end of the credit crisis. that would free gs up to start making a lot of money again, especially now that there are fewer players with the capital to do things.

long gs

from a ku fan to the athletes on the basketball and football teams

THANKS FOR YOUR VERY MEMORABLE SEASONS!!!!!

today's market action

after the surge of buying earlier in the morning, the major indices spent the better part of the day holding near the highs of the session, but the action deteriorated in the final hour. all in all, however, it was a good day for the bulls. for those that believe in the technicals, volume increased, breadth finished the day at about 3:2 to the positive and biotechs, retailers and chips led to the upside.

that said, the propensity of this market to fade late in the day is quite annoying. this uncertainty gels with the overall lackluster action we’ve seen over the past week or so, but at the same time, the averages continue to hold on pretty well. even if we don’t get another big rally, the longer this continues, the more likely it becomes that investors will start inching back in simply to keep pace. that sort of action can feed upon itself, because as some start to add exposure, the market moves higher, and that will pull yet more money in off the sidelines.

if this market can continue to hold on and we start seeing some better volume, there’s a good chance of that sort of scenario of play out. however, earnings season will likely keep the action choppy.

Wednesday, April 9, 2008

a thought on amd and dell

for years amd wooed dell and for years dell remained a dedicated intc customer. then at exactly the wrong time, dell jumped into the amd pool and the amd shareholders splashed around loving it. now that amd had "the big fish" it turned around and irritated many of its smaller accounts by redirecting parts to the big fish to keep it happy.

fast-forward now to early 2008 and we discover that dell no longer has amd-based PCs on its web-site and, despite the spin from Round Rock, TX it's clear they have pushed amd to the back seat.

now, amd pre-announces and restructures, once again. this one, i think, is more amd-related than the economy, but it's clear the macro trends don't help.

jpm

it makes such a difference when the boss has real skin in the game. when dimon took his position at the helm of jpm he wrote a $50 million plus check at the time to buy shares. clearly in the months that have followed, the bank has taken a prudent posture. this is what one would expect when the CEO has his own money at risk. now the bank is reaping the rewards. not only are they able to acquire bsc at a bargain price, but they are also able to hold onto their performing LBO Loans and not have to sell them at a discount.

of course the one thing that the bank needs to maintain is a sense of caution going forward. one of the worst things that can happen in the financial business is overconfidence. chase the bank still has a long way to go in terms of customer service, and JP Morgan is in a very competitive corporate market. so everyone still has to keep putting one foot forward after the next. hopefully, dimon has the force of personality to instill that in his troops going forward.

Position: Long jpm

the inhaled insulin experiment looks to be over

inhaled insulin looks dead. pfe and nktr warned of an increased lung cancer risk for diabetics using the inhaled insulin exubera. recall, exubera flopped commercially, leading pfe to stop marketing the product and terminating its partnership with nktr. but nktr was trying to land another partner for the drug; those efforts have now been terminated. clearly, this new safety concern with inhaled insulin is a killer for mnkd as well because it's still trying to develop its own product.

"cash is king" companies worth considering

these are balance sheet bargains. these cash-rich, debt-poor companies, operating mainly in the tech sector, have the potential to deliver outsized returns.

acti - provides digital identity assurance solutions for the enterprise, government, healthcare and financial service markets worldwide. the company provides software and hardware products that enable organizations to issue, manage and use trusted digital identities for secure physical and logical access, secure communications and legally binding digital transactions. the balance sheet sports $2.65 per share in cash and burn rate has slowed considerably.

cogt is a provider of automated fingerprint identification systems (AFIS) and other fingerprint biometrics solutions to governments, law enforcement agencies and other organizations worldwide. its afis solutions enable customers to capture fingerprint images electronically, encode fingerprints into searchable files and compare a set of fingerprints to a database of potentially millions of fingerprints in seconds. the company is profitable and the balance sheet contains nearly $5 per share in cash.

cspi develops and markets information technology integration solutions and high-performance cluster computer systems to meet the requirements of its industrial, commercial, scientific and defense customers worldwide. these include manufactured hardware products used in an array of applications, including radar, sonar and surveillance signal processing. the stock trades for just 8.5 times notoriously volatile earnings and 25% of sales while cash of $5.29 per share represents nearly all of the current share price.

cybe is a global supplier of optical process control sensors and inspection systems that are used to control the manufacturing process and to ensure the quality of electronic circuit boards manufactured by its customers using surface mount technology (SMT). it also manufactures and sells sensors that assist with yield improvement and the placement and transport of wafers during semiconductor fabrication. the company has $3.50 per share in ‘Current’ cash and equivalents and $2.40 per share in ‘Long-Term’ marketable securities and the bottom line is solidly in the black.

dram is a developer, manufacturer and marketer of large-capacity memory products primarily used in high-performance network servers and workstations. it provides customized memory solutions for original equipment manufacturers (OEMs) and compatible memory for computers manufactured by Sun, HP, IBM, Silicon Graphics and Dell. earnings are highly volatile, but the price to sales ratio is 0.80, there is $2.05 per share in cash on the balance sheet and the stock yields 8%.

ditc is a global telecommunications equipment supplier for mobile and wireline operator communication networks. though the company is profitability challenged, ditc trades only 5% above the $2.79 per share in cash on the company’s balance sheet. in addition, ditc currently has no debt and is only trading at 50% of tangible book value.

efii is a market leader in print technology, providing color digital print controllers, super-wide format printers and inks, and print management solutions. the balance sheet has no long-term debt and $9.09 per share of net cash. shares of efii are trading at 14.5 times 2008 earnings forecasts, as reported by reuters.

ivac is a provider of disk sputtering equipment to manufacturers of magnetic media used in hard disk drives. the company also develops and provides technology for low-light imaging sensors, cameras and systems, and management (which comes from Applied Materials) has just entered the chip equipment biz. forward-looking earnings will weaken, but the company has been very profitable and there is more than $6 per share in cash on the balance sheet.

nte is an electronics manufacturing and design services provider to a select group of original equipment manufacturers of telecommunications and consumer electronic products. nte manufactures electronic components and sub-assemblies, including liquid crystal display (LCD) panels, LCD modules, flexible printed circuit sub-assemblies and image sensors modules and printed circuit board assembly for Bluetooth headsets. the trailing P/E is less than 10 and the price to sales ratio is 0.55, while the balance sheet has more than $5.50 per share in net cash and the stock yields 9%.

rack is a provider of servers, storage and data center solutions that target data center deployments. its products are designed to provide benefits in density, power efficiency, thermal management, ease of serviceability and remote management. the balance sheet carries no debt and $6.72 per share in cash. shares of rack are trading just slightly above tangible book value per share.

tlgd designs, engineers, markets and supports test system, test access and status monitoring products and test software for the telecommunications and cable television industries in the us and in certain international markets. its telecommunications test access products enable telephone companies to use their existing line test systems to remotely diagnose problems in Plain Old Telephone Service lines containing both copper and fiber optics. the company generated decent profits in ‘07 and expects to be more profitable in ’08, while the balance sheet contains more than $4 per share in cash.

untd is a provider of consumer Internet and media services through a number of brands, including NetZero, Juno, Classmates and MyPoints. untd's primary communications services are internet access and e-mail. its primary content and media services are social networking and online loyalty marketing. there is a lot of excitement surrounding classmates, while the legacy businesses are still generating lots of cash, the balance sheet is healthy and the stock yields 7%.

wstg is a marketer of technical software and hardware for microcomputers, servers and networks in the us and canada, targeting software development and information technology (IT) professionals within enterprise organizations. through its wholly owned subsidiary, Lifeboat Distribution Inc., the company distributes products to dealers and resellers in the us and canada. the recent quarter was sub-par in terms of the top and bottom lines, but the company still earned $0.20 per share and the trailing-12-month P/E is less than 13. the balance sheet has $5.06 per share in cash and the stock yields 6%.

the most clutch shot in ku history!!

observations on the fed minutes released yesterday, 4/8/08

it's been a while since we’ve seen such a negative sounding fomc. in the minutes from their most recent meeting, fed officials note soft labor demand, declines in industrial production, stalled real consumer spending, a continuing contraction in the real estate market, and a decline in fourth quarter GDPs in the major advanced foreign economies.

probably most concerning, however, is the admission that the fed’s “staff projection showed a contraction of real GDP in the first half of 2008….” moreover, even though the fed has repeatedly stated that they expect inflationary pressures to recede, they raised their forecast for core PCE in the first half of 2008 and that headline PCE would “substantially exceed” core PCE in 2008. we'll see if they know what they're talking about....

although the general consensus is that the economy will recover in the second half of this year as the result of more accommodative monetary policy and the fiscal stimulus package, the minutes mention that “uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated.”

moreover, meeting participants also noted that while the recent liquidity facilities the fed had introduced would help the credit market, the “strains were likely to raise the price and reduce the availability of credit to businesses and households.”

certainly, this is a gloomy document, but the question is: to what extent has the market already priced this in? none of this is news....

the market for wed., 4/9/08

the complete lack of volume and positive news over the past several days caught up with the market today, and even though we finished off the lows of the session, the dip buyers spent the day camped out on the sidelines.

for those that believe in them, the ability of this market to hold above key technical levels despite the negative news flow has been encouraging, but the absence of anything really positive has started to take its toll on investor sentiment, and the dip buyers who have been supporting this market look to be starting to sit on their hands.

the bottom line is that the bounce that began last tuesday isn’t dead, but it won’t be long before the selling picks up as we drift lower. hopefully, the calculus between earnings, expectations and reactions will give this market some juice, but we’ll just have to wait to see how that plays out.